Alternative investments are edging into the mainstream after years of being available only to institutional investors and the upper elite of private investors. This shouldn’t be a surprise given the market volatility of the last few years and the increasing recession predictions. However, the economy isn’t the only reason alternative investments are becoming more attractive to financial advisors and retail investors. Alternative investing continues to evolve, and today alts come in many shapes, sizes, and levels of complexity.
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Let’s explore the barriers that have kept alts in an ivory tower, why they’re becoming mainstream, and how advisors and their clients can incorporate alts into their portfolios.
Barriers to alts investing
While alts are becoming more common in retail portfolios and self-directed IRAs, incorporating them still presents many challenges. Ultimately, it comes down to access.
Public, but not publicly traded
Alternative investments aren’t usually publicly traded, which means they aren’t typically available to retail investors. Investors must meet specific criteria to be eligible to invest in alts because of their complex nature, reduced regulatory oversight and degree of risk.
Accreditation
Following the Great Depression, the United States government introduced the Securities Act of 1933 as well as the Securities Exchange Act of 1934 to structure and regulate the securities industries. Part of the remit, of the newly formed Securities and Commission, was to protect less sophisticated individual investors who may not have the wherewithal to sustain losses from complex and/or high-risk investment opportunities they may not fully understand. Today, only accredited investors (those with the qualifications or assets to weather the risks) may invest in alts.
High cost of entry
Additionally, most alts have prohibitively high minimum investment requirements and associated fees for the average retail investor. For example, many alternative funds have a minimum investment threshold of at least $1 million, putting them out of reach for the average investor.
Read the full article here by Joseph Gerdes, Advisor Perspectives.